Freight Payment Outsourcing: Getting Finances in Ship Shape

By Lisa Harrington

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Consider this: Because of administrative overhead, it costs large companies about $11 to pay one freight invoice. For a company with 1,000 carrier invoices a month, that's $11,000. But if a third-party freight payment/auditing firm processes these invoices, companies pay just 5 percent to 10 percent of this benchmark cost per bill.

Companies that outsource their freight payment and auditing activities can save anywhere from 2 percent to 5 percent of their total freight bill by catching inaccurate charges or duplicate payments.

But as good as these numbers sound, they don't reflect the real opportunity in outsourcing freight payment and auditing functions, according to Harold Friedman, senior vice president global corporate development with Ft. Myers, Fla.-based freight payment/auditing firm Data2Logistics.

"It's taken for granted that freight payment firms provide accurate and timely freight bill payment and auditing, and save companies money by catching errors," Friedman says. "The real thrust behind what freight payment firms do today is business intelligence. You can give companies reams of information or access to a database, but if you give them information they can base business decisions on—that is valuable."

The value delivered by outside freight auditing/payment service providers takes a number of forms:

Freight rate benchmarking. "Freight payment firms can help companies understand the transportation market's current rate picture," Friedman explains. "Years ago, shippers could go to a tariff system and see the cost of shipping from point A to point B. Today they can't do that because every carrier has its own rates."

Drawing from its large client rate database, Data2Logistics can easily show how a company stacks up against shippers with comparable freight.

"This is powerful information for negotiating with carriers," Friedman says. "Shippers can say to a carrier, 'Generally your freight rates are fair and equitable. When I ship between these two markets, however, I pay too much.' You can talk specifics."

"Freight payment companies can tell shippers whether they are 10 percent above the market or 5 percent below in their industry," says Richard Palmieri, president, Schneider Financial Services, a subsidiary of Schneider National. "This helps transportation managers know whether to re-bid their freight—a process that takes nine to 10 months, is costly, labor intensive, and can disrupt the supply chain. Why put shippers and their carriers through that only to find out costs were on target already?"

Inbound routing guide compliance. To better manage inbound freight costs, Data2Logistics customers can load their routing guides on the payment firm's web site. Vendors can log in and see how to ship their customers' products.

"Once a carrier presents a freight bill, we can check whether the vendor complied with the customer's routing requirements," says Friedman. If a vendor uses the wrong carrier, Data2Logistics determines the cost of that non-compliance.

"Then we drive that amount into the customer's accounts payable system, so they can deduct a penalty from their supplier," he explains. "That's a far cry from just getting bills paid within seven days."

Robust technology. Third-party freight audit/payment companies offer technology and expertise many companies don't have in-house. "Like most companies today, we don't have the expertise on staff to pre-audit our freight bills," says George Yarusavage, manager of transportation procurement for Verizon Wireless. "We have no internal way to collect the data our carriers generate."

And Verizon, which spends $160 million annually on freight, has no interest in investing in the systems and resources required to handle these tasks. Instead, it outsources these responsibilities to Data2Logistics.

Third parties can accelerate payment to carriers, settling invoices in as little as 72 hours from receipt and authorization. "It used to be common for carriers not to be paid for 45 days because of manual processing delays," Palmieri says. "That put tremendous financial stress on carriers. Today, that's changing because companies understand transport capacity is limited, so service goes to companies with the best payment behavior."

More robust technology has another advantage. "Historically, 4 percent to 6 percent of freight services went unbilled," says Palmieri. Transactions fell through the cracks or problems dragged on unresolved because of inaccurate or incomplete information.

"If problems go unresolved for months, the carrier effectively is lending the shipper money," Palmieri explains. Because carriers tend to be smaller and less financially strong than their customer companies, "this can impact a carrier's financial stability, which you want to avoid in a trading partner relationship," he says.

How do the benefits of outsourced freight auditing and payment play out in real-world logistics networks? Logistics executives from two companies—Toyo Tires, and Molex Inc.—share their stories.

Toyo Tires: A Reengineering Tool

Toyo Tires, which manufactures and distributes high-performance and original equipment replacement tires for cars, trucks, buses, and other vehicles, began working with The Logistics Department, Orange, Calif., six years ago to design a freight payment and auditing system.

"Today, we have an excellent management tool that allows us to keep track of all freight payments," says Jay Carroll, vice president of logistics for the U.S. division of Toyo, a Japanese company. Toyo's U.S. freight bill averages about $20 million annually.

Carroll negotiates freight rates with carriers, and turns these rates over to The Logistics Department, which loads them into its rate file. Toyo uses a core group of carriers, usually two to three companies for each type of carrier—regional and national LTL and TL. The company operates regional warehouses across the United States—two in Southern California, and one each in Dallas; Atlanta; Allentown, Penn.; and south central Illinois.

"We do the freight mixing on the West Coast then replenish to the regional DCs," Carroll explains. Toyo tires are manufactured in Japan, China, Illinois, and soon Georgia.

"We have tailored this system specifically to Toyo Tires' needs," Carroll notes. If the company sends a 14,000-pound shipment from its Mira Loma, Calif., warehouse to Omaha, Neb., for example, it can enter the ZIP-to-ZIP data and ask the system to compare cost-per-mile and service times for various LTL and TL carriers.

"Though a normal truckload for Toyo is 30,000 pounds, the system may indicate that routing the shipment by TL—even though the freight only fills 60 percent of the truck—is cheaper and faster," explains Carroll. "It takes the guesswork out of routing decisions."

"The system can simultaneously compare up to 30 carriers, re-pricing every shipment in the user's shipment history with every carrier that submits rate data," according to Steve Paris, partner, The Logistics Department. "The system shows the top four finishers in every lane. If the customer decides to use those carriers and rate data, then that data automatically populates the rate shopping system. The client can start using those carriers the next day.

"We can also generate traffic lane analyses that are helpful to shippers looking to put freight business out to bid, or replace a carrier," he adds.

A company can, for example, profile its LTL shipments over a period of time, and include those reports in its RFPs to prospective carriers. This way, carriers know exactly what they are dealing with in terms of freight flows and volumes. "This eliminates surprises later on in a relationship," Paris says.

Depending on the system, Toyo pays its carriers within five or six days of receiving an invoice. "Because we are a good paying customer, we seldom are out of equipment, and we are serviced very well," Carroll says.

When Carroll came to Toyo 10 years ago, the company used 67 carriers and was doing one-fifth the business it does today. "Because we have grown 400 percent to 500 percent since then, we now have multiple million-dollar carriers, where before we had none," he says. "The system information helped us make the decisions to whittle down our carrier base to this core group."

On a more strategic level, Toyo uses the freight payment/audit system to perform different what-if scenarios.

"We opened four warehouses and closed four warehouses based, in part, on the results of these what-if analyses," Carroll says. "We set up our warehouses so that each one services certain states based on freight rates and service times from these facilities. We use the system to look at different service-price combinations and move freight accordingly."

This type of strategic transportation information has helped Toyo reengineer its logistics network and operations, and cut millions of dollars in costs.

Molex Incorporated: Buried No More

Molex Incoporated is one of the world's largest manufacturers of electronic, electrical, and fiber optic interconnection products and systems; switches; and integrated products, supplying companies in the automotive, computer, telecommunications, and industrial sectors.

For the past 10 years, Molex has used Continental Traffic Service Inc. (CTSI), Memphis, Tenn., to handle its freight payment and auditing responsibilities.

"With our old system, if I needed to run a query summarizing carrier activity year to date, and I wanted to drill down into detail on a particular carrier, I had to run a new query to get to that information," says Jim Kicher, Molex's Americas region logistics manager. "It was a cumbersome and time-consuming process. Using the CTSI system, I get the drill-down details I need." The system is also able to export the information into Excel and other formats.

Any Molex user can establish key performance indicators (KPIs), then set up a series of graphs to run automatically, comparing transportation information such as month-to-month or year-to-year data, cost per pound, number of shipments, and accessorial charges.

"I can look at charts that show our domestic freight cost per pound by month this year compared to previous years," Kicher says. "If I see a spike in one month, I can click on that bar in the graph and the system automatically gives me all the details, down to the pro number level, to look at origin, destination, weight, and carrier. The level of detail is only limited by the information we ask CTSI to capture."

Molex and CTSI are also in the process of setting up a claims management tool. This tool will allow Molex to have a single report showing shipping and claims activities when it meets with carriers.

"I can say to the carrier, for example, 'You handled 5,000 shipments, we had 20 claims, and we settled 18,'" Kicher says. "I can break down the claims by location to see that we're having a problem isolated to inbound shipments to a specific facility. We can drill down to the source of the damage to figure out the cause.

"We had one supplier, for instance, whose packaging wasn't adequate to protect the material," he continues. "We isolated the cause, and went back to the supplier to work through the issue."

A number of Molex's carriers transmit their invoices electronically, via EDI, to CTSI. "That has been a big benefit," Kicher says.

And a new process where Molex's truckload carriers key their shipments in CTSI's system as they occur is also in the works. This information feeds CTSI's audit and payment process.

"Carriers don't have to create paper invoices and wait for them to be delivered, hand processed, and paid," Kicher explains. "By managing these steps electronically, we can reduce the payment process by up to 10 days. The carriers are satisfied, and this improves our relationships with them."

Finally, CTSI offers another tool that helps Molex increase efficiency—electronic freight bill resolution (EFBR). Any transaction that falls outside Molex's criteria for rates, address validation, or general ledger cost account coding, among others, automatically goes into the EFBR system where it remains pending until it is reviewed.

"Every day we review the EFBR folder. CTSI scans the documents in question so we can look at the actual invoice and backup paperwork and approve or disapprove payment. In the past, these exceptions were handled manually, by mail," Kicher explains.

From Mountains to Molehills

Overall, outsourcing its freight audit/payment activities has been a boon to the company, says Kicher.

"We used to do a lot of manual paperwork processing to pay freight invoices," he says. "The mountains of paperwork would grow until we had to take the work home over the weekend and flush it all through the system at once. This caused sudden spikes in freight payments, which was a serious concern to our finance department.

"Today," he says, "because we're being proactive and managing our freight information, we no longer have peaks and valleys in our freight payment processing. Now, if freight bill payments peak, it's because the business peaked, not the paperwork. If we didn't have these tools, we'd still be buried under paper."

Clearly, for companies such as Toyo, Molex, and Verizon Wireless, the value of outsourcing their freight bill auditing and payment activities goes beyond finding overcharges.

"We use the pre-audit information to better manage our freight," notes Yarusavage of Verizon. "Our distribution center employees can see patterns in missed deliveries, or look at charges for Saturday deliveries, and supply that information to the marketing managers so they can see the cost of doing business.

"At companies I've worked for in the past, we sold the idea of using an outside freight rate pre-audit/payment provider on the basis of recovery—catching billing discrepancies," he continues.

"But even then, collecting and using shipment data was more valuable than the payment recovery process. Companies can see their inbound and outbound shipment patterns by week or month. They can monitor whether they are using the right carriers or types of carrier. And shippers can use the information to decide where plants or distribution centers should be located."